March 17, 2010

How can Paul Krugman be so wrong about heathcare?

When I read Paul Krugman’s New York Times column last Friday, my jaw dropped. Among other amazingly obtuse things he said was this: “Which brings me to the third myth: that health reform is fiscally irresponsible. How can people say this given Congressional Budget Office predictions — which, as I’ve already argued, are probably too pessimistic — that reform would actually reduce the deficit?”

And how does it reduce the deficit? By upping federal taxes, pushing more Medicaid costs off on to the states (where it will also increase taxes, but the CBO doesn’t care about state taxes), and by cutting federal funding for Medicare by $500 billion over 10 years.

Plus, by limiting some (but not all) of the much-despised treatment denial practices, it will push the price of private policies higher, above where they would otherwise go, enabling yet higher profits for insurers. But the CBO cares not about what happens to policy costs – they too are outside the federal budget, which is all it examines.

So the total national healthcare bill, federal, state, and private, will be bumped up considerably by Obamacare. It “reduces the deficit” only because it raises federal taxes, cuts Medicare funding substantially, and pushes many costs off to states and private policy holders.

For what? All so the federal government can throw a much needed lifeline to the health insurers. It will protect health insurance company profits by guaranteeing them tens of millions of new customers, sending them $500 billion directly as a dole from the public till, and letting them sell yet higher priced insurance for yet greater profits.

How can all this be missed by a Nobel-prize winning economist?

And why doesn’t Krugman discuss the incredible 45% markup (over the cost of actual medical treatments) imposed by the healthcos? (They don’t get all of it – some is the cost they impose upon providers who must hassle with them for payments.) At 45%, it is just plain huge compared to any other kind of insurance.

What “value add” do they deliver for that markup? None – except for risk-spreading, worth maybe 3%.

So why do they need that outrageous markup? (CEO salaries are completely negligible by comparison, and insurer profits are also relatively inconsequential.) It’s because their business model is broken – to stay competitive, they MUST each spend huge amounts on armies of “denial clerks” to deny treatments, and thereby also impose costs on providers fighting for payments. This is the inevitable consequence of having multiple competing pools of insured policy holders.

Any rise in denial costs (a big part of the markup) results in a decrease in treatment costs (“medical losses”, which includes actual healthcare delivered plus provider "hassle costs" induced by denials). A rise in total costs induces a rise in policy prices, and so risks losing out to the competition. So denial costs rise until any further rise would increase the sum of both denial costs and treatment costs. The famous "unseen hand" of the market seeks out a denial cost level where any further increase is exactly balanced out by the reduction in medical losses it would induce. Unfortunately for all, that balance occurs at a very high level of denial costs, which means the business model is badly broken. The "free market" cannot deliver health insurance without a huge markup for treatment denial costs.

The resultant wasted healthco gross margins and provider administrative expense adds up to a dead loss of more than $3 trillion over ten years. That's $3 trillion! Which is why, if we are to have health insurance coverage without wasting tons of money, health insurance MUST be socialized, perhaps best at the state level.

And why do private insurers so much need life support from the federal government? Because they face a descending spiral of declining enrolment, which has been dropping for more than 10 years and is now accelerating downward, driven ever lower by higher and higher prices.

It would be great to see the renowned Paul Krugman address these questions. But he doesn’t.

The last best chance for real “healthcare reform” is the new Medicare Option. Open up Medicare so it can be purchased by anyone at cost. Help make it happen! Call your representatives in Congress TODAY!